Cost Plus Pricing

Prof. Andrew too put forward a cost plus doctrine of price fixation by businessmen.
Andrew scrutiny is similar to that of Hall and Hitch but there are some variations
among the two.

A significant variation amongst the two falls in the use of the aspect of costing margin
by Andrew. The costing margin is conceived by Andrews as a supplementary to invariable
average direct cost and will usually likely to cover the costs is the indirect aspects
of manufacturing and offer a normal level of net profit.

Therefore, like the scrutiny of Hall and Hitch addition of costing margin to the average
variable cost for fixation of price of the commodity goes against the price fixation
on the basis of profit – optimising doctrine of the traditional thesis of value.

Therefore, the aspect of costing margin of Andrew is likely to the mark-up of Hall and
Hick but there is a variation in that whereas Hall and Hitch overlooks a invariable
or inflexible mark-up or a margin for expenses cost and normal profit, Andrews discusses
at length the circumstances in which there might be some flexibility in the costing
margin in response to rivalled and market influences.

As shall be carried out later the introduction of flexibility in the costing margin
brings Andrew cost plus or average cost price thesis closer to the price thesis depends
on profit optimisation doctrine.

Another variation among Andrew and Hall and Hitch’s versions of cost plus pricing
thesis is that while the latter use kinked demand curve along with average cost pricing,
the former does not make use of the twisted demand curve postulates in his cost plus
pricing thesis.

Still another significant variation among the two is that whereas Hall and Hitch is
regarded that average cost changes with productivity and average cost curve is U Shaped.
Andrew outlooks, for a huge pertinent range of productivity, average direct cost stays
invariable.

Andrew cost plus pricing thesis may be summarised as below:

The rate which will be set by a entrepreneur industry parities the estimated average
direct cost of manufacturing plus a costing margin. In other words rate will be
parities to the full cost per unit of productivity.

Next to it, Andrew presumes on the basis of experiential investigations that average
direct cost i.e. average variable cost stays invariable over a huge range of productivity,
given that prices of direct aspects (i.e. variable aspects stays unvaried).

Therefore, as per Andrew average direct cost curve is a horizontal straight line
over a good part, if the prices of variable aspects stays invariable.

As said above, the costing margin will cover the cost per unit incurred on the
indirect of manufacturing i.e. fixed aspects and on the general rate of profit.

Once fixed the costing margin will stay invariable whatever the level of
productivity. However costing margin will differ as a consequent of the permanent
variations in the prices of indirect i.e. fixed aspects of manufacturing.

As mentioned before, Andrew also outlooks variations in the costing margin in response
to the rivalled and market forces.

Lastly, Andrew scrutinises also suggests that provided the rates of direct aspects
of manufacturing the rate of commodity will stay the same whatever the level of
productivity.

Lastly at the rate predetermined on cost plus basis the provided commodity will
have a well defined market and the industry will sell the volume of the commodity
demanded at that price by the purchasers.

The thesis of cost plus pricing as propounded by Andrew is explained diagrammatically
below. Cost Curve AC in this diagram denotes the average direct cost i.e. average
variable cost.

It will be seen that average direct cost curve AC is saucer shaped that is it first
drops then stays invariable for rather a huge enhancement in productivity and then
ultimately hikes.

Relatively, to this MC is marginal cost curve, MC curve drops in the beginning
and lies at the start and lies below AC, then it coincides with AC curve and ultimately
MC lies above AC.

In order to proceed to fix the price, apart average direct cost a business industry
has to compute the total indirect costs and also the volume of profits it wishes
to earn.

The aggregate indirect costs plus the volume of profits planned capitulates a fixed
sum of money which will stay invariable for fixation of price in the short run.

The costing margin as per to Andrews is procured from this fixed sum of money by
dividing it by some chosen productivity.

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